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Greek Red Tape

by Elaine Schwartz    •    Mar 23, 2012    •    248 Views

Our story begins with 3 Greek entrepreneurs who want to create an e-commerce business selling olive products. It ends as Oliveshop.com begins to flourish with orders from the U.S., Australia, Japan, Mongolia and beyond.

The middle of the story, though, is the problem.

Occupying 10 months, these entrepreneurs filled out an avalanche of forms, satisfied tomes of regulations, stood for hours on lines, and endured multiple inspections. The pension office needed proof that that their pension contributions were up-to-date. The Health Department required lung x-rays and stool samples. Greek banks would only process payments if they switched the language of the website from their clients’ languages to Greek. And, there was much more.

Our bottom line: Procedures ranging from forms to lines to inspections are called transaction costs. The higher the transaction cost, the less likely the activity.

The Economic Lesson

During 2011, the Greek GDP contracted by 6.9% while its debt climbed to 165% of GDP. Meanwhile, its unemployment rate is close to 20%. Greek statistics provide tangible evidence of how excessively high transaction costs can retard economic activity.

In a Teaching Company Course, “America and the New Global Economy,” economist Timothy Taylor tells us the nations with considerable regulation tend to have more corruption. Correspondingly, Transparency.org’s Corruption Perception Index 2011 gives Greece a low grade for 2011.

In the World Bank’s Doing Business Index 2012, for the “starting a business” category, Greece ranks 135 out of 183 countries. (The U.S. was #13 and New Zealand, #1.)

This 2012 McKinsey Report looks at Greece’s problems and its potential.

An Economic Question: How does one new business affect the 4 GDP components (business, consumer, government purchases and exports minus imports)?

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